R&D and non-linear productivity growth

Abstract

The present paper studies the relationship between R&D investment and firm productivity growth by explicitly modelling non-linearities in the R&D–productivity relationship. We employ a two step estimation approach, and match two firm-level data sets for OECD countries, which allows us to relax the linearity assumption of the canonical Griliches (1979) knowledge capital model. Our results suggest that: (i) R&D investment increases firm productivity with an average elasticity of 0.15; (ii) the impact of R&D investment on firm productivity is different at different levels of R&D intensity—the productivity elasticity ranges from −0.02 for low levels of R&D intensity to 0.33 for high levels of R&D intensity implying that the relationship between R&D expenditures and productivity growth is highly non-linear, and only after a certain critical mass of knowledge is accumulated, is productivity growth significantly positive; (iii) there are important inter-sectoral differences with respect to R&D investment and firm productivity—firms in high-tech sectors not only invest more in R&D, but also achieve more in terms of productivity gains related to research activities.